Shadow Corp. has no debt but can borrow at 6.8 percent. Thefirmâs WACC is currently 8.6 percent, and the tax rate is 35percent.
a. What is the firmâs cost of equity? (Do notround intermediate calculations. Enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)
Cost of equity %
b. If the firm converts to 30 percent debt, what willits cost of equity be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
Cost of equity %
c. If the firm converts to 40 percent debt, what willits cost of equity be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
Cost of equity %
d-1 If the firm converts to 30 percent debt, what willthe company's WACC be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
WACC %
d-2 If the firm converts to 40 percent debt, what willthe company's WACC be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
WACC %
Shadow Corp. has no debt but can borrow at 6.8 percent. Thefirmâs WACC is currently 8.6 percent, and the tax rate is 35percent.
a. What is the firmâs cost of equity? (Do notround intermediate calculations. Enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)
Cost of equity %
b. If the firm converts to 30 percent debt, what willits cost of equity be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
Cost of equity %
c. If the firm converts to 40 percent debt, what willits cost of equity be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
Cost of equity %
d-1 If the firm converts to 30 percent debt, what willthe company's WACC be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
WACC %
d-2 If the firm converts to 40 percent debt, what willthe company's WACC be? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces, e.g., 32.16.)
WACC %
Related questions
Money, Inc., has no debt outstanding and a total market value of$150,000. Earnings before interest and taxes, EBIT, are projectedto be $36,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 15 percent higher. Ifthere is a recession, then EBIT will be 25 percent lower. Money isconsidering a $95,000 debt issue with an interest rate of 8percent. The proceeds will be used to repurchase shares of stock.There are currently 6,000 shares outstanding. Ignore taxes forquestions a and b. Assume the company has a market-to-book ratio of1.0. |
| a-1. | Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and round your final answers to 2 decimalplaces. (e.g., 32.16)) |
| ROE | ||
| Recession | % | |
| Normal | % | |
| Expansion | % | |
| a-2. | Calculate the percentage changes in ROE when the economy expandsor enters a recession. (Negative amounts should beindicated by a minus sign. Do not round intermediatecalculations.) |
| % change inROE | ||
| Recession | % | |
| Expansion | % | |
| Assume the firm goes throughwith the proposed recapitalization. |
| b-1. | Calculate the return on equity (ROE) under each of the threeeconomic scenarios. (Do not roundintermediate calculations and round your final answers to 2 decimalplaces. (e.g., 32.16)) |
| ROE | ||
| Recession | % | |
| Normal | % | |
| Expansion | % | |
| b-2. | Calculate the percentage changes in ROE when the economy expandsor enters a recession. (Negative amounts should beindicated by a minus sign. Do not roundintermediate calculations and round your final answers to 2 decimalplaces. (e.g., 32.16)) |
| % change inROE | ||
| Recession | % | |
| Expansion | % | |
| Assume the firm has a tax rateof 35 percent. |
| c-1. | Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and round your final answers to 2 decimalplaces. (e.g., 32.16)) |
| ROE | ||
| Recession | % | |
| Normal | % | |
| Expansion | % | |
| c-2. | Calculate the percentage changes in ROE when the economy expandsor enters a recession. (Negative amounts should beindicated by a minus sign. Do not round intermediatecalculations.) |
| % change inROE | ||
| Recession | % | |
| Expansion | % | |
| c-3. | Calculate the return on equity (ROE) under each of the threeeconomic scenarios assuming the firm goes through with therecapitalization. (Do not round intermediate calculationsand round your final answers to 2 decimal places. (e.g.,32.16)) |
| ROE | ||
| Recession | % | |
| Normal | % | |
| Expansion | % | |
| c-4. | Given the recapitalization, calculate the percentage changes inROE when the economy expands or enters a recession.(Negative amounts should be indicated by a minus sign. Donot round intermediate calculations and round your final answers to2 decimal places. (e.g., 32.16)) |
| % change inROE | ||
| Recession | % | |
| Expansion | % | |
